Estate and Succession Planning

Looking to the future, have you considered what is to happen to your forestland when you are gone? Unfortunately, many landowners don't plan ahead, resulting in forced liquidation of family forests or severe disruptions in management. The following circumstances surrounding your personal and land situation need to be carefully reviewed with your family, attorney and/or estate planning advisor:

  • your vision and goals for the property
  • your spouse's and childrens' goals for property
  • land and timber inventory
  • charitable giving interests

For additional information, read the University of Florida Extension publication, Estate Planning.

What is the Potential Problem?

Without proper planning, a valuable piece of land in a private estate may trigger an estate tax so large that the land would have to be sold in order to pay the tax.  If your goal is to pass your land, fully intact, on to your children and your children's children, proper planning is essential to avoid the catastrophy described above.

There are several reasons why this problem exists for so many families:

  1. The dramatic increase in land values over the past few decades, particularly in many parts of Florida, has added wealth to many families.
  2. While federal income tax rates have generally decreased, Federal estate taxes remain high.  The highest Federal estate tax rate exceeds 50%.  (See the estate tax update for more information)
  3. Many families want to protect their land.  The family land ethic wasn't as common when it was easier to find a desirable place to live, or a suitable ranch or farm. If you wanted to find an attractive location like the one you own now, you might not be able to afford it.  Consider your forestland to be irreplaceable!
  4. Many families are unaware of their land's value, and therefore do not recognize that the land requires special attention and a special kind of estate planning.

Considering these factors, what do you want to do?

  • Do you want to pass your land, fully intact, on to your children or heirs?
  • Do your children want to carry on the ownership and management of the property?
  • Is your land's high value a problem to you? Could you use it to your advantage?
  • How high is your land's value compared to the rest of your assets?
  • Is your land likely to appreciate significantly?
  • Does your land have development potential?
  • Do you have an estate plan?  Does it give special attention to your real estate?
  • Do you want to cash in on the value of your land?
  • Would you consider giving all or part of your land to charity?

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Estate Planning Problems Unique to Forestry

  1. Land dedicated to timber production usually has a very long investment horizon, 20 to 30 years or more in the south.  This limits the potential number of buyers in the market for wood products and requires skill, timing, and some luck in order to receive top market values when transferring timber properties.  To complicate matters further, timber prices are volatile and often follow long, irregular price cycles.
  2. Income from the forest is irregular because most private nonindustrial forests are not managed to provide an even flow of income.  In even-aged forest stands, there are 4 revenue zones, outlined in the Timber Income Liquidity Zones for an Even-Aged Stand chart. Keep in mind that these values are approximate and are highly dependent on the species, region, site, and the site preparation and intermediate cultural treatments used.
  3. Continuity of management can be difficult when land tenure is for a short time.  Federal tax laws often complicate the transfer of timber properties to heirs and tend to favor liquidation of growing stock.
  4. It can be difficult to obtain credit because forests are considered "unimproved" real estate and are financially unproductive in zones I and II (see number 2 above).  You may have good credit, but it may be difficult for your spouse and children to obtain credit if they do not have a proven credit record of their own.

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Estate Tax Update: Not a Done Deal

The President's Tax Relief Act of 2001, H.R. 1836, gradually increases the unified credit exemption, while reducing the top estate tax rate between 2002 and 2009, with a 12-month repeal of the estate tax in 2010. That 12-month detail is important because this repeal "sunsets" on January 1, 2011, at which time the top estate tax rate and unified credit revert back to today's tax law*, unless Congress re-repeals the tax by December 31, 2010.

Year Unified Credit Top Estate Tax Rate
2001 $675,000 55%
2002 $1 Million 50%
2003 $1 Million 49%
2004 $1.5 Million 48%
2005 $1.5 Million 47%
2006 $2 Million 46%
2007 $2 Million 45%
2008 $2 Million 45%
2009 $3.5 Million 45%
2010 REPEAL 0%
2011 $675,000* 55%

This temporary estate tax repeal could be costly for families that assume the repeal is permanent. Unless you are certain that you will die in 2010, it is best to plan the transfer of your estate according to current tax law. Provisions under the federal tax law allow landowners to protect or "shelter" their assets from estate taxes by creating trusts and/or making tax-free gifts. Talk to a financial advisor, tax law attorney or certified public accountant to explore your options. This is perhaps the most important step you can take to secure the future of your property for your children and grandchildren.

*On January 1, 2011, the top estate tax rate will revert back to 55% and the unified credit will drop back to $675,000 or $1 million, a matter of law interpretation. 

Read the Joint Committee on Taxation's Comprehensive Summary of H.R. 1836 in pdf format.

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The Will

A well-planned will allows your loved ones to handle your affairs smoothly and conveniently.  It also ensures that your property will be distributed the way you want, with the lowest possible tax liability.

When a person dies without a will, all states have laws of descent and distribution which determine what becomes of the decedent's property.  Spouses, children, parents, brothers and sisters, and other relatives are usually considered in that order.  However, state laws vary greatly when second and third marriages are involved.  Such laws rarely consider your heirs' needs, contributions, or the tax consequences of the distribution.

University of Florida Extension Publications

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Beyond the Will: Trusts, Gifts and Business Structures for the Family Farm

There are many objectives you may wish to consider in addition to those outlined in your will.  Some of the critical ones are outlined below.

Minimize Transfer Costs: Trusts

One of the fundamental goals of estate planning is to minimize transfer costs at the time of death.  Transfer costs include federal and state death taxes, probate expenses, and the cost of managing the estate.  Careful planning can reduce these costs.  Several types of trusts can be used to help "shelter" your heirs from the full brunt of these costs.  See these publications for more information on trusts:

University of Florida Extension Publications

Charitable Gifts

You may be considering a gift of a portion of your assets to a charity. This type of gift can bring considerable tax benefits.  Charitable Remainder Trusts allow you to transfer your appreciated property, stocks, or bonds to a trust during your lifetime.  By doing this you will receive a current tax deduction, avoid capital gains, and estate taxes may be reduced.  Trusts are usually designed to distribute income to you and/or a family member during your lifetime(s).

There are many gift planning options available.  You should explore as many of these options as possible to ensure that your life's work is protected.

Create a Business Structure for the Family Forest

This structure defines how business is conducted, how you are taxed, and what how much liability you bear.  The best structure will depend on how large and complicated the business is.  Family Limited Partnerships and Limited Liability Companies are currently the most preferred structures for family lands but there are many options.  For complete descriptions of ownership structures for farms or ranches see http://www.timbertax.org/publications/aghandbook/pdf/ch12.pdf and http://www.cfra.org/files/BusinessStructure.pdf.  

Also see: Family Timberland Partnerships

Continuity of Forest Management

The time required to settle an estate can vary from a few months to several years.  It is important to specify that managment of your forestland and other important business operations continue during this transition time.  Your will can be used for this specification.

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Assistance & Resources


Assistance

If you have not yet planned for the future of your property or have not given careful consideration to some of the factors introduced in this section, the time to start is now. Below are some helpful links and contacts to help you get started.

Resources

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